Posted by Fred Lake

IRS Update Guide to Business Meals and Entertainment Deductions

IRS Update Guide to Business Meals and Entertainment Deductions

After the publication of the TCJA, it was evident that several areas of the new law needed clarification. One of the laws that need clarification is the meal and entertainment expenses deductions. 

The Internal Revenue Service (IRS) recently released additional information on entertainment, meals, certain vacations, other vacation expenses, and deductibility.


Background

Meal and travel expenses are generally deductible if they are ordinary, necessary, and reasonable expenses connected with or associated with the active conduct of the business or activities of an entity and duly justified. No deductions are allowed for personal, housing, or family expenses. Under the TCJA, no deduction for entertainment expenses is allowed after December 31, 2017. According to Notice 2018-76 and final rules issued by the Treasury, when expenses for qualifying meals are accompanied by entertainment. Special charge provisions apply to maintain the deductibility of eligible meals.

Below is an analysis of the most common categories that may affect your business based on the Treasury's up-to-date information.


Recreational Meals for Employees

The IRS recently issued guidance to employees on various recreational meals and clarified that the TCJA changes did not eliminate the separation for the deductibility of qualified "recreational" meals. Employee recreational meals for the benefit of employees and/or family members are 100% deductible, provided they do not include customers, contractors, or potential customers. Employee recreational meals are typically meals at employee recognition events, vacation events, employee picnics, and outings and events associated with team-building exercises. Holiday meals, employee picnics, and other recreational and fun activities that benefit all employees are 100% deductible. Meals combined with entertainment that do not fall under employee entertainment tables are discussed in the entertainment section below. Meals and snacks placed in bathrooms, pantries, or other living spaces and cohabitation of employees are not considered in the "recreational meal" rules and are therefore not 100% deductible.


Meals For The Convenience of the Employer

Meals provided by the employer to an employee at the employer's premises for the employer's convenience are deductible as an additional de minimis fringe benefit. These meals are now limited to a 50% deduction under the TCJA. Before the TCJA, these meals were 100% deductible for the employer. Meals that are considered de minimis perquisites may also be excluded from the employee's gross income. Instances include providing meals to employees during an emergency or on duty and cannot otherwise guarantee adequate nutrition. Likewise, meals offered at an employee-run food establishment, such as a cafe or company bar, are also subject to a 50% deductibility limit.


Meeting and Business Meals Expenses

In the case of meals with a prospect or client, the employer or employee must be present at the table to be eligible as a deductible expense. Also, these meals should be reasonable and correlated or associated with the active conduct of business. Therefore, expenses related to business meetings of employees, owners, agents, and directors will remain deductible at 50%.


Entertainment Expenses

According to the TCJA, no deduction for entertainment expenses is allowed. This applies to all expenses for any activity considered to be amusement, entertainment, or recreation. The term "entertainment" includes nightclubs, cocktail parties, theaters, country clubs, sporting events, golf and athletics clubs, hunting, fishing or similar trips, vacation trips, or the like other activity related to entertainment or leisure.


It will now be necessary to consider business meals' location to determine whether it is a nondeductible entertainment expense. Reception fees for clients or potential clients are no longer deductible. Sports and entertainment tickets are no longer deductible, even if there is a commercial purpose. The IRS issued Notice 2018-76, and the final rule states that taxpayers can deduct half the value of meals, but only if they meet the following conditions:

  • Expenses are normal and necessary expenses under Section 162 (a) which are paid or incurred during the financial year in carrying on any business or trade;

  • Expenses are neither exaggerated nor extravagant under these conditions;

  • An employee of the taxpayer or the taxpayer is present when the food or drink is purchased;

  • Beverages and food are provided to a current and potential client, client, consultant, or business contact; and

  • In the case of food and drink provided during or as part of an entertainment activity, the food and drink are purchased separately from the entertainment, or the cost of the food and drink is shown separately from the cost of the entertainment in one or more accounts invoice or receipt. The entertainment rejection rule cannot be circumvented by inflating the amount charged for food and drink.


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Fred Lake
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